Liquidity
Markets live and die based on liquidity. In simple terms, liquidity is a measure of how many buyers and sellers are present, and whether transactions can take place easily.
In a liquid market, a seller will quickly find a buyer without having to cut the price of the asset to make it attractive. And conversely a buyer won’t have to pay an increased amount to secure the asset they want. Typically, protocols offer rewards (via staking) that encourage investors to provide liquidity and fuel the protocol’s ecosystem.
In typical protocols, there are a few common challenges:
  1. 1.
    Large liquidity providers (known as “whales”) may suddenly exit liquidity pools in pursuit of what they perceive to be higher rewards in other protocols or to avoid impermanent loss that happens with sudden token price shocks. There is no long term commitment, so the level of liquidity may be highly volatile
  2. 2.
    Flood of sell pressure by liquidity providers taking profits when they receive staking rewards. Either constantly as rewards are provided, or in single large sell-off events by whales that cause a cascade of follower sales and steep token price drop
A key to countering these common challenges is for the protocol itself to own as much of the liquidity as possible. Other climate-oriented DAO’s such as Klima see the protocol owning more than 80% of liquidity in its major liquidity pools. This ownership is primarily accomplished via the bonding mechanism.
For us, it's much simpler. Roughly 70% of any given solar project we develop is debt-financed. Of the remaining 30%, 2/3 are provided by institutional capital and private equity via USD. The final 1/3 will be provided by NFT purchase, which means that only 1/3 of minted Zuva tokens are ever distributed. Our approach to locking liquidity ensures a type of vesting period before rewards are distributed, allowing us to retain additional share of total liquidity.
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